What is Levered vs Unlevered Beta?
Levered beta (equity beta) measures how sensitive a company’s equity returns are to broad market movements after factoring in financial leverage; it captures both business risk and the extra volatility created by debt in the capital structure.
Unlevered beta (asset beta) strips out the impact of debt and tax shields, isolating the pure business risk of the underlying assets so you can compare companies on a like-for-like basis and then re-apply a target debt-to-equity ratio. Together they sit at the core of CAPM, cost of equity, and WACC, linking capital structure choices to valuation, hurdle rates, and shareholder value.
Formula
Standard Hamada-form style relationships between levered and unlevered beta:
- Levered beta (given unlevered beta):
- Unlevered beta (given levered beta):
where:
- = levered (equity) beta
- = unlevered (asset) beta
- = corporate tax rate
- = debt-to-equity ratio based on market values
Example
1. Computing levered beta from unlevered beta
A business has an unlevered beta of 0.8, a target debt-to-equity ratio of 0.5, and a corporate tax rate of 25%. Using the formula:
Equity in this capital structure is slightly more volatile than the market, so CAPM will return a higher cost of equity than for an otherwise unlevered firm.
2. Computing unlevered beta from levered beta
A listed company shows a levered beta of 1.2 with the same $D/E=0.5$ and tax rate $T=25\%$. The implied unlevered (asset) beta is:
Analysts can now use $\beta_U\approx0.87$ as a clean business-risk beta for peer comparison, then re-lever it to any target capital structure for valuation, cost of equity, and WACC scenarios.